U.S. loan giant Freddie Mac is projecting slower national apartment rent growth as high supply, elevated interest rates, and moderating performance are expected to weigh on the industry in the second half of 2024.

While the appetite of Americans for renting apartments was strong at the end of 2023 and into the first quarter, supply should outpace that demand, hitting a cyclical high in 2024, the government-sponsored enterprise said. Roughly 665,000 units are expected to open to renters nationwide this year, more than double the annual average of about 300,000 units from 2015 to 2019.

Freddie Mac’s baseline forecast for 2024 is for 2.7% U.S. rent growth over the year, just slightly lower than the 2.9% average from 2000 to 2022. Projections for rent growth could be lower if vacancy rates remain relatively stable rather than increasing to a predicted 6%, an indication that landlords are favoring higher occupancy over rent increases. Along similar lines, CoStar Group analysts predict rent growth could reach 2.2% by the fourth quarter, with a vacancy rate near 8%.

“Although new supply is at a nearly 40-year high, that headwind will be short lived, and is typically located in areas with high demand,” Sara Hoffmann, senior director of multifamily research at Freddie Mac, said in a statement. “That will cause multifamily performance to remain subdued this year, but over the longer term, the multifamily market appears primed for growth due to an overall shortage of housing, an expensive for-sale housing market and favorable demographic tailwinds.”

The spike in new openings, according to Freddie Mac, is a direct result of multifamily starts and construction permits that peaked at levels not seen in nearly 40 years in 2022. And while 2025 should see fewer openings, the lender estimates a total of 460,000 additional apartments over that time, with additional units opening through 2026.

Freddie Mac estimates nearly 480,000 units were opened in the 12 months ended in March, representing a 2.5% expansion in inventory.

Elevated supply levels are also leading to moderating rent prices, Freddie Mac said. Year-over-year price increases reached just 0.2% as of May, and have been at or below 0.3% each month since August. Over that time, occupancy declined to recent lows of 94.1% in late 2023 and have since remained relatively flat.

Moderating rent prices, combined with stabilized occupancy rates, is an indication that apartment operators are willing to forgo rent increases in favor of keeping units occupied, according to Freddie Mac’s analysis.

New supply and its effect on rent has not been spread evenly, however. Markets with the greatest rent declines as of May 2024 had the largest rent increases through 2021 and 2022 attracting much of the supply that has been concentrated in these areas.

Freddie Mac noted Austin, Texas; Jacksonville; Florida; Atlanta, Georgia; San Antonio, Texas; and Raleigh and Durham, North Carolina, as markets with rent declines and headed lower than previous years. But these markets generally performed better than most markets during the pandemic, with cumulative rent growth of 14% or more since the first quarter of 2020.

Those areas are consistent with regional trends with the greatest rent declines in the Sun Belt of 2.2% on a yearly basis in the first quarter, followed by the Mountain West at 0.6% and the West Coast at 0.2%. In contrast, the Midwest and Northeast, with much lower levels of new supply, each showed positive rent growth. The Midwest grew 2.7% over that time, while the Northeastern gained 2.4%, driven by less expensive secondary and tertiary markets that have seen increased demand and little new supply.

As these areas work through the additional supply, Freddie Mac predicts markets will see slow but positive growth, bolstered by a strong economy and labor market that should fuel multifamily demand.

Rent growth is expected to be greatest in secondary and tertiary markets that offer a lower-cost alternative to larger more expensive markets, particularly in the Southern Plains and Sun Belt. Leading price growth projections is Oklahoma City and Tulsa, Oklahoma, where gross rental income for the year is expected to come in above 5.2%, more than double the 2.5% national average. Other regions could hang onto rent growth momentum.

"The Midwest appears well-positioned to maintain its leading role in rent growth," according to a CoStar analysis on the apartment market. "With the region nearing equilibrium in terms of supply and demand by mid-2024, it is poised to see a renewed expansion in rent growth in the latter half of the year."

But the effects of slower rent growth and higher-for-longer interest rates have suppressed property values, leading to muted transaction activity. First-quarter sales volume was down 22% compared to the first quarter of 2023. Freddie Mac expects more stability in interest rates along with yields from 10-year Treasury bonds in the second half of the year that should boost multifamily transaction volume to roughly $320 billion in 2024, up from $250 billion in 2023.

Aggressive rate cuts by the Federal Reserve could push that estimate higher to nearly $365 billion, but Freddie Mac warned that if interest rate volatility remains and rent price growth moderates more than expected, transaction volume could slip to 2023 levels.